College Planning for U.S. Expats

You’ve got kids. They may be small now, but before you know it, they’re off to college. Unfortunately, the cost of a university degree in the United States has become incredibly daunting. Therefore, planning for college expenses is imperative, and getting an early start provides an absolute advantage.

According to the College Board, the average cost of tuition and fees for a private university in the United States is slightly over $30,000 per year (excluding room and board). Public schools are more affordable, but still clock in at over $22,000 per year (out-of-state tuition). Furthermore, every year the cost of tuition increases at a rate much higher than inflation.

In this article, we discuss 529 plans for U.S. expats. A 529 plan is basically a savings account established for the purpose of funding a college education. There are two types of 529 plans; however, the main ones are sponsored by individual States.

Why are 529 plans great? From a tax advantage, there are clear advantages. Account balances grow tax deferred. And when the proceeds are used to pay for qualified college expenses, there are no tax consequences. So if you can afford to save for college, a 529 plan is a fantastic vehicle for doing so.

For U.S. citizens living abroad, setting up a 529 plan can be slightly tricky. That is because many expats do not have residency in a particular state. In these cases, we recommend establishing a 529 plan with Vanguard (one of the largest mutual fund companies in the world). Vanguard 529 College Savings Plans are sponsored by the State of Nevada, but is open to any investor. Vanguard is renowned for its low fee structure, so more of your money goes toward covering college expenses. For more information, go to: https://investor.vanguard.com/what-we-offer/college/overview.

As of the publication of this article, roughly 110 countries either have FATCA  (Foreign Account Tax Compliance Act) agreements in-place with the United States or are in discussions. Thus far, Suriname has not yet signed an agreement. But it is probably just a matter of time before FATCA comes to Suriname.

The first clue is when local banks begin handing out W-9s to U.S. citizen account holders. This is an indication that local government has had significant internal discussions, and have briefed the banks to prepare for FATCA. The key information on a W-9 is the social security number. When banks in Suriname begin transmitting account information along with a SSN, the IRS will be able to easily pursue U.S. citizens and green card holders for not reporting foreign earned interest.

Technology is making the world a lot smaller. Computers will be able to instantly flag many delinquent taxpayers. Prior to FATCA, expat tax returns were largely based on an honor system. With FATCA, the IRS has the ability to electronically reconcile expat tax returns with foreign bank account information. It may take the IRS several years to actually pursue someone, but that is clearly not a desirable situation. Along with penalties for not reporting interest income, there may be penalties for not filing the FBAR or Form 8938 (if applicable).

Our best guess is that Suriname will become a FATCA-compliant country within the next 2 years. For U.S. expats in Suriname, it’s a good idea to get compliant before FATCA becomes effective.

American expats are subject to U.S. income taxes regardless of where they live and where they make their income. Furthermore, there are special requirements and issues to consider when it comes to tax return preparation. Over the next several months, we will be addressing some of the tax complexities faced by American expats living in Suriname.

Question: Do I really need to file U.S. taxes?

In general, individuals with income <$9,750, or married couples filing jointly with income <$19,500 do not need to file (for 2013). However, the filing requirement is completely different for self-employed people. The threshold is a meager $400 in earnings.

Child Tax Credit – Reason to file even if you are under the filing requirement

Many expat families with children <17 years of age should file a return in order to take advantage of the child tax credit. As long as earned income is at least $3,000, there is a good chance you will qualify. Each child is worth up to $1,000 money back from the IRS even if you don’t owe any taxes.

Foreign Earned Income Exclusion and Foreign Tax Credit

Without doubt, the IRS filing requirements cast a wide net. However, many U.S. expats end up not owing taxes because of certain exclusions and credits available to them. The most important of these are the foreign earned income exclusion (FEIE) and foreign tax credit. With the FEIE, up to $97,600 of foreign earned income while living abroad is excludable from federal tax. The $97,600 works in conjunction with other deductions. As a result, one can have more than $100,000 in income, and pay no taxes. For married couples, both of whom are working, the exclusion amount is doubled. In order to qualify for the FEIE, one must meet be either the bona fide residence or physical presence test.

With the foreign tax credit, taxes are paid to a foreign country offset U.S. tax liabilities. The foreign tax credit is normally utilized when one has paid income tax to a country with a higher tax rate than that of the U.S. For most expats in Suriname, the FEIE is a more applicable tool than the foreign tax credit.